An attempt to demystify the process of raising capital, democratize information and help entrepreneurs improve their businesses by avoiding the mistakes that I've already made... and occasionally include a personal post because Rich told me to.

Wednesday, March 22, 2006

Investor Pitch: Sales are King

As an active member of the Silicon Valley startup community, I often have the pleasure of listening to other entrepreneurs give their investors pitches. I really enjoy listening to other people's presentations because I always find it interesting to learn how other people distill their complex ideas and products into digestible sets of 10-15 slides. Last week I sat in on a presentation from a very interesting company. The founders came across as knowledgeable and the product seemed to be compelling. Overall pitch needed a bit of polish here and there but it was solid and I suspect they will be successful raising capital. However, they team did make one big mistake in that they did not put their best foot forward.

The team tried grab attention of the audience by citing a favorable review from a consumer electronics magazine that I had never heard of. As I learned later in the presentation the company had in fact already sold millions of dollars worth of their product in less than two years... Which is absolutely fantastic! I don't remember which award the product won from which magazine, but I do remember exactly what their cumulative sales figures were. The investor pitch should have included these excellent sales figures (and equally compelling revenue ramp) in the first slide (or two) to capture everyone's attention and add credibility to the rest of their presentation. With the possible exception of broad circulation publications like Consumer Reports, there are simply too many industry niche magazines for these types of reviews to add much external credibility. However, customer traction will always get an investor's attention.

There are numerous plausible venture ideas, however, it is customer traction that demonstrates a company's ability to execute. Thus, investors place a high degree of importance on various forms of customer traction as one of the key milestones by which stages of investment and valuations are determined. The weakest form of traction is an identifiable problem. If you can't identify a problem or real customer pain that your product solves forget about raising capital. Next, would be a statement (letter of interest/intent) from a prospective customer acknowledging the need for your proposed solution. The strongest statements indicate how much the customer is willing to pay for the solution and a willingness to speak directly with investors. Adding still more credibility are alpha/beta testing partners. While testing partners rarely pay to participate, there is (or at least should be) a sales process around getting testing agreements in place (signed) and costs associated with the customer's time and effort, which means they are unlikely to participate in testing without any intention of buying the finished product.

While identifiable problems, written statements and testing partners are all credible forms of market traction, sales are clearly king. There is nothing that validates the worthiness of the product/solution, business model or the team's ability to execute like sales. For startups with significant revenue, sales will nearly always be their most impressive accomplishment.

It is very important for entrepreneurs to put their best feet forward when pitching to investors. Most venture firms review over 3000 opportunities per year, which necessitates that they make quick decisions. If you don't get your most valuable points across immediately you may already be written off. In fact, a general partner of one famous Sand Hill Road VC told me he usually makes his decision with in the first 5 minutes of a meeting. For companies with rock star management teams or unique business models, it is possible that customer traction may not be their most compelling accomplishments.* Yet, very few startups truly have rock star management teams (my guess = less than 1%) and only a couple of new business models succeed each decade.** Thus, I believe it is a fair generalization that most entrepreneurs should open their investor pitches by describing the customer traction they've achieved. Regardless of what the exact accomplishment is, successful entrepreneurs capture investor's attention by leading with their best feet forward.

*see here in the paragraph on the 3rd key lesson for my description of a rock star management team**see here under the section titled "The Hook" for a further description of what startups best assets commonly look like